Record profits abound, though pricing challenges loom with potential loss volatility
Fitch Ratings has revised its outlook for the global reinsurance sector from “improving” to “neutral,” indicating that the pricing cycle may have passed its peak.
Despite this, the sector is expected to maintain strong profitability by historical standards into 2025, according to the agency’s latest report.
The report attributes record profits in 2023 and the first half of 2024 to favorable underwriting conditions, steady investment income, enhanced balance-sheet resilience through rising capital levels, and strengthened reserve adequacy.
These factors have provided a solid foundation for reinsurers to manage potential pressures, including declining prices, increased claims costs, and high catastrophe losses.
Fitch projects that underlying margins could stabilize or slightly decline in 2025 compared to their peak in 2023-2024. Although the market is becoming more competitive, with ample capacity from traditional and alternative sources, reinsurers are expected to maintain underwriting discipline.
While premium rates are unlikely to harden further in 2025, a significant loss event in the second half of 2024 could lead to upward rate adjustments. The report also notes that capitalization levels are expected to remain strong, allowing for continued high levels of capital repatriation in 2025 while providing a cushion for any unexpected earnings volatility.
In terms of credit quality, Fitch reports that the majority of insurer financial strength (IFS) ratings are in the “AA” (Very Strong) and “A” (Strong) categories, reflecting robust capital positions, resilient earnings, and solid business profiles. Lower ratings in the “BBB” to “BB” range are mostly concentrated in emerging markets, where operating environment and sovereign-related risks are more pronounced.
During 2024, reinsurers saw ratings affirmations and three upgrades, with no downgrades reported. Most reinsurers maintain a stable outlook, with the exception of Swiss Re, which holds an A+ rating with a positive outlook due to improving financial performance.
Several factors are highlighted as potential challenges for the sector going forward. These include adverse loss development trends in US casualty lines amid rising social inflation and the possibility of large, unexpected losses from increasingly frequent and severe natural catastrophes, particularly secondary peril events.
The systemic nature of cyber risk also poses a challenge, with reserving and pricing strategies yet to be tested by a significant cyber event. Additionally, the sector could face earnings volatility under IFRS 17, driven by changes in long-term economic and operational assumptions within the life and property and casualty sectors.
Manuel Arrivé (pictured above), director at Fitch, commented that while the reinsurance market has started to soften, heightened loss activity could slow or stop this trend.
He added that further improvements in the sector’s strong credit fundamentals are less likely at this stage of the cycle, but noted that the sector remains in a stronger position than it was a year ago to handle potentially less favorable market conditions.
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